2012 fincom session 1

8/3/2019 2012 FinCom Session 1

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Reporting and financialcommunicationSkema - MSc Finance - 2012

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Skema 2012 - Reporting & Financial Communication - Session 1

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Reporting and financial communication

2

Presentation

Objective

Course organisation

Evaluation


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Course organisation

Session 1: financial communication inside the corporate organisation

Session 2: regulaory framework

Session 3: Recurring communication on financial performance

Session 4: Ongoing communication

Session 5: CSR and extra-financial Communication

Session 6: Financial communication during operations

Session 7: Financial communication for non-public companies

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Evaluation

Make a group of 5

Pick a company

Prepare a slideshow presentation\ max. 15 mn

\ company presentation: activities, key financial data, markets, challenges, strategy, stock market

\ in a way that address the issue described in the document

Notation will include\ Company understanding

\ Financial understanding

\ Presentation design and simplicity

\ Oral presentatio

\ Group coordination

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Reporting and financialcommunication - 1Skema - MSc Finance - 2012

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Agenda

Financial communicationinside the corporate organisation

1. What is financial communication ?

2. Internal processes for information production,certification and disclosure

3. Corporate organisation & ethical principles

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What isfinancial communication ?

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8/41Skema 2012 - Reporting & Financial Communication - Session 1


Principles of rhetoric

Rhetoric : (from Latin rhetorica the art of speaking well )is an art or a technique of persuasion, generally via the language

Rhetoric principles are set up around 5 questions:

\ Who ?

=> body or corporation issuing the message

\ Says what ? => message content\ Via which media or support? => set of techniques used to spread the

information

\ To whom ? => audience receiving the message

\ What is the impact ? => how the message can influence the audience

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Source : Wikipedia




Global definition of communication

Communication is:

\ the act of communication, creating a relationship with others,transmitting something to someone

\ the whole means and techniques that allow the transmission of a messagetoward an audience that may be vast and heterogeneous

\ and the action of a body or a corporation to give informationand to promote its activities toward a public ,

to maintain its image by any media mean

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Source : Wikipedia




General definition of financial communication

Financial communication concerns:

\ any kind of information or message

\ and any kind of communication support

\ issued by corporations that seek for financing and/or report to those whohave provided such financing

\ and dedicated to the financialcommunity

Issuer of the message :Corporation that offer of securities tothe public (equity or debt)

Main audiences targeted :\ securities buyers :

individual shareholders, institutionalinvestors

\ intermediates and prescribers :financial analysts, journalists

Expected impact : to provide

Investors with every element thatcan minimise the asymmetry ofinformation

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Regulated / Non regulated Financial communication

Corporate bonds and equities issuance on regulated markets,are subject to the European regulatory framework of Public offering

Public entities may issue bonds reversed to accredited investors,with a specific regulatory framework:\ Local authorities (Regions, Cities)

\ Public authorities (Social Security Agency)

\ National States

Public Offering regulation framework is not relevant for financing provided bybusiness angels, private equity, banks

Those counterparts nevertheless require specific financial communication

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A great variety of stakeholders

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Information deliveredby the issuer

Rumours

Informationout of the control of the issuer

InstitutionalInvestors

MediaPress

AuthoritiesAdvisors

Institutes

Employees & ManagementEmployee-shareholdersUnions & Works councils

NGOs & lobbies

Individualshareholders

Brokers

Internalcommunication

CorporateCommunication

InvestorRelations

Public Affairs& Lobbying

Issuer




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Financial communication supports market efficiency

A component of financial markets\ An obligation defined by the Law

\ A necessity for efficient markets

\ Under the control of an independentAuthority (SEC, FSA, AMF)

\ And submitted to civil and criminalsanctions

Has structured itself along-with thehistorical development of financialmarkets\ Accounting information

\ Financial information

\ Corporate information

\ Financial marketing

A global communication towardshareholders has progressivelyemerged\ With specific language and tools

\ Repackaged it for various targetaudiences

\ Implemented by specialised teams

Best practises spread to:\ non-listed companies

\ investment funds, banks, business partners




Financial communication results from theimplementation of a corporate strategy

How is the companypositioned within its environment ?

\ shareholding structure and control

\ importance of share valuation

\ financial image of the company sector

\ operational and financial performance

\ Outlook and prospects

Which goals?\ seek financing for future developments

\ preserve independence

\ renew shareholding structure

Which meansto achieve these goals?\ shareholders policy,

corporate governance,dividend policy

\ financial communication& disclosure policy

\ investors relation policy

\ retail shareholderspolicy

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Higher valuation of the share price,

Attract new shareholders,

Shareholding stickiness,

Ease access to financing means and reduce the cost of debt,

Improve the group brand image



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Efficient financial communication leads to:




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Information asymmetryAkerlof - 1970 - The market for Lemons

information asymmetry occurs when, in a transaction, one party has more or better information than the other:\ the vendor knows better the quality of the good he/she sells

\ the worker knows better his/her own value than the company that wants to hire him/her

This creates an imbalance which causes market inefficiency\ adverse selection: as they are confronted with a lack of information to distinguish good/bad

products, buyers tend to lower the price offered ; vendors of good products then refuse tosell at a discounted price and leave the market ; the market is not efficient

\ moral hazard: a person signs a contract with an insurance company, in order to prevent aspecific risk; the insurance company will price the coverage based upon an probabilityanalysis ; once he/she knows he/she is covered by the insurance, the person may change

their behaviour and be less careful ; risk probability increases as well as costs for the insurancecompany.

The effects of Information asymmetry in financial marketshave been widely studied


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Internal processesfor information production,

certification and disclosure

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Financial disclosures

Information must be delivered on-time\ Financial reporting flow and consolidation process

\ Auditors due diligence

\ Information and approval from the Supervisory Board

\ Information to employees representatives & Work Council, Unions

Information must be structured and commented\ Analysing of information internally

\ Preparing communication tools: press release, slideshow, reports

\ Organising information meetings: conference calls, one-to-one and one-to-many meetingswith financial analysts, investors, journalists shareholders meeting

Information must be scheduled\ Every companies communicate at the same periods

\ Disclosure has to be equal for every audience

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International Financial reporting Standards (IFRS)

GAAP and financial standards shallreach 2 aims:\ guarantee that financial statements give

a true and fair view of the situation of thecompany in every dimension

past / present

assets / liabilities

profitability / risks

\ allow to value and compare thecompany

time-wise / sector-wise

produce forecasts / discounted cash flows

Since 2005, listed companiesmust be IFRS compliant\ initially created for investors purposes

\ and for a convergence with US GAAP

Financial communication hasbecome each time more complex\ IFRS are more complex and increase

volatility on balance sheets and P&L

\ IASB keeps producing new standards,widely objected to by every category ofusers (corporations, analysts, investors)

\ The US keep delaying a possibleconvergence IFRS/ US GAAP

Some companies now disclose non-IFRS financial statements, restated to

be understandable\ Comparison between companies and

sectors is nothing but from easy

\ While accounting and auditing costssurge

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Financial calendar

For a company ending financial year on December 31st

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Disclosure Deadline Form

Q4 & Annual sales February 15th Press releaseConference call

Annual results April 30th Press releaseInformation meetings

Q1 sales May 15th Press releaseConference call

Annual

shareholders meetingJune 30th Public meeting

Q2 & interim sales August 15th Press releaseConference call

Interim results August 3&st Press releaseInformation meetings

Q3 & 9-month sales October 15th Press releaseConference call


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Accounting teams in each subsidiaryprepare the financial package in linewith the accounting principlesapproved by the Board

Consolidation teams ensure global

coherence, make adjustments andproduce consolidated accounts

CFO and IRO analyse the resultsand produce the official information,message

External auditors control and certifyaccounting results and everyinformation provided to the market

The Supervisory board approvesfinancial statements and draft

communication tools, backed by theAudit Committee

CEO, CFO and IRO will then disclose theinformation

Accounting and finance organisation

ProductionFull, timely & reliable

ControlFair, Accurate & comparable

StructureUnderstandable & compliant

DisclosureEqual & Simultaneous

financial information process


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Accounting and consolidation

Accounting teams are in charge oflegal and analytic reporting\ for each subsidiary

\ in accordance with group consolidationand accounting rules

\ and IFRStandards

Reporting deadlines are increasinglyshort, while reported informationtends to become more complex anddetailed

Local accounting teams deal withauditors correspondents

Consolidation team is in charge ofproducing group financial information\ Sales intercos

\ Goodwill valuations and depreciation

\ Defferred tax assets & liabilities

\ Impairment tests

High-expertise in IFRS is required

As well as the capacity to discuss andnegotiate with external auditors

And a good understanding of marketreactions to accounting decisionsand disclosures

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Internal audit

Internal audit teams assess that information is consistent andthat operational teams are compliant with procedures\ Accounting methods for sales, inventories...

\ Cash payment, provisioning methods for customers & inventories\ Security of assets of the company

\ repartition and delegation of responsibility

Their aim is to identify and address every potential risks\ Risk of fraud

\ Risks of uncontrolled cash & payment policy

\ Industrial risks, people protection, environmental respect

\ Risk concerning credibility and corporate image

\ Financial risks: credit, exchange rate, cash

Companies are

required to report

on the quality of

their internal control

procedures


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External audit

Auditors certify that financial statements are true and fair, based on:\ Random controls of the different accounting processes for the company and its subsidiaries

\ Meetings with the accounting teams and company management, on any technical or

strategical aspect\ And they engage their responsibility

An widening scope of information is to be submitted to Auditors certification\ Content and consistency of the Reference Document

\ Report of the Board on corporate governance and internal control

\ Financial forecasts\ Information concerning Sustainable development

\ Operations concerning securities and the shareholders rights

External audit is a crucial component of trust\ cf. Enron / Arthur Andersen case

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Supervisory Board

The Board is responsible for supervising, monitoring andevaluating the management of theCorporation in the best interest ofthe shareholders

The Board is to approve financialstatements before disclosure\ Members of the Board hold civil an

criminal liability toward shareholders

\ Increasing commitment from boardmembers changes the process,

as they need time to achieve their task \ The Board creates a dedicated team in

order to achieve specific controls onfinancial statements: the auditcommittee

The Board is also responsible for overseeing the execution andfulfilment of strategy andfundamental goals\ strategic plan and options

\ approval of the budgets\ Merger & acquisitions

\ Executive compensation program,including the variable portionbased on earnings targetsand individual performance

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Audit committee

The Audit committee is an extension of the Board\ Initially a Best practise, they tend to become a legal requirement (cf. European Statutory

Audit Directive)

\ Committees composition is not regulated.Best practise :a majority of independent members;

members with a relevant expertise in accounting and finance;

executive members excluded

\ The Audit Committee can use any means to understand accounting options,and evaluate if risks are correctly anticipated and addressed

The Board bears the ultimate responsibility for approving financial statements\ It is the legal institution liable toward shareholders

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Chief Financial Officer: a key position

Financial communication is under the responsibility of CFO\ According to specific studies among Europe, CFO estimate that financial communication

takes at least 50% of their working time

\ Experience of listed companies and financial communication requirements is a highly-soughtexpertise

\ More and more listed companies tend to recruit a person responsible for and dedicated tofinancial communication: the IR Officer, attached to the CFO

Financial communication has to co-ordinate with other functions in thecompany\ Operational functions to collect information

\ HR for internal communication and legal requisite

\ Communication, in order to ensure that the company delivers a consistent message,even to different targets

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Chief Executive Officer : fully committed

CEO is legally responsible for the information disclosed to the market\ Civil Liability

\ Criminal Liability

CEO is strongly committed in financial communication, considering:\ required time and commitment

\ legal responsibility

\ company s credibility: the CEO embodies the company, its vision and values

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Investors Relation Officer: a matter of influence

A very delicate position\ in the US, generally a senior VP,

\ in France, it is not so often

\ he is one of the official speakers for thecompany

Always involved in major decisions

Need to have a strong knowledgeof every aspect of company life

Brings market perception andexpectations back to the topmanagement

No operational power but a stronginfluence

No specific profile but a financialbackground is required\ financial analysts

\ controller

Communication skills is a must

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Strategic risks related to financial communication

Risks related to the share price\ Sharp change in share price, due to an inappropriate anticipation of a specific disclosure

\ Under valuation due to a inefficient or insufficient communication

\ High volatility in share price due to a lack of liquidity

Risks for the company\ Difficulties in finding a financing due to a low share price

or a lack of interest from investors

\ Risk to loose the control of the company (public offer)

\ Risk to face tension inside (staff) or outside (business partners) the company

Risks for the management\ criminal risk in the case they disclose unfair and untrue information, they try to manipulate the

share price, or are involved in insider process

\ Risk to be dismissed if shareholders consider the company to be under valued

\ Risk for their personal wealth

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Business case

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http://www.vivendi.com/vivendi/Resultshttp://www.vivendi.com/vivendi/Results


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Corporate organisation

& ethical principles

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Common organisation of an IR Teamin a medium-to-large cap



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CFO

Head of IR

2/4 persons2/6 persons1 Assistant

Contact with thefinancial market :

Analysts & investors

Q&A

Reporting : market evolution,analysts feed-backs

Annual report

Shareholder analysis

Individuals shareholdersFinancial web site

SRI

Team schedule

Data Base

Logistics

Dissemination of

the press releases


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Who does IR ?

A dedicated team or not : depending on the size of the company\ with the support of one/several IR consulting agency (ies)

With a key position within the organisation\ Direct report to the CFO

\ Close to the CEO & Executive Committee

Financial background required\ either from corporate finance: accounting & auditing, management control, cash

management

\ or from financial markets: financial analysts, corporate access



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Main tasks

Financial Communication\ Designing and editing financial documents : press release, annual report, financial web site

\ Managing the dissemination of the financial communication

Investor Relations\ Main contact for Investors and analysts

\ Organisation and attendance to analysts meeting, road-show, conference

\ Individuals shareholders : letters, meetings, club

\ Organisation of the AGM

Others\ Preparation of Board Meeting

\ Communication on Sustainable Investment issues

\ ...



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Aims and objectives : external

KEEP INFORM the financial marketon a regular basis on financialaccounts, outlooks and strategicissues

ADAPT the communication to the

different stakeholders needs whilestill delivering the same messageand information

ANTICIPATE and manage theexpectations and the fears of the

financial marketIMPROVE the company brandimage without overselling the stock

BUILDa professional relationshipbased on confidence and credibilitywith the stakeholders

A good UNDERSTANDING of thecompetitive environment

On going MANAGEMENT of the consensus



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Aims and objectives : in-house

HAVE ACCESS to the informationin-house that could have an impacton the share price

CO-ORDINATE the corporatecommunication with the other departments of the company

REPORT to the Top Management onmarket, sector and company

perception from analysts andinvestors = advisory role

REPORT to the Board Members onmarket expectations



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Integrity\ Honest and ethical conduct, including

the ethical handling of actual or apparent conflicts of interest betweenpersonal and professional relationships;

\ Full, Fair, Accurate, Timely and

Understandable Disclosures\ Consistency and comparability of the

released information

Equality\ Equal access to information for all

categories of audience

\ Simultaneous disclosure of anyinformation that may impact thevaluation

Responsibility\ Compliance with Laws and Regulations

\ Accurate risk management andprocedures of control



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Main principles


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Code of ethics

ITW (electronic components)http://investor.itw.com/phoenix.zhtml?c=71064&p=irol-govconduct

AT&T (telecoms)http://www.att.com/gen/investor-relations?pid=5595

CBS (media)http://investors.cbscorporation.com/phoenix.zhtml?c=99462&p=irol-govConduct

CLIFF (French Investor Relations Association)http://www.cliff.asso.fr/Code%20de%20deontologie.asp

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http://www.cliff.asso.fr/Code%20de%20deontologie.asphttp://www.cliff.asso.fr/Code%20de%20deontologie.asphttp://investors.cbscorporation.com/phoenix.zhtml?c=99462&p=irol-govConducthttp://investors.cbscorporation.com/phoenix.zhtml?c=99462&p=irol-govConducthttp://investors.cbscorporation.com/phoenix.zhtml?c=99462&p=irol-govConducthttp://investors.cbscorporation.com/phoenix.zhtml?c=99462&p=irol-govConducthttp://www.att.com/gen/investor-relations?pid=5595http://www.att.com/gen/investor-relations?pid=5595http://investor.itw.com/phoenix.zhtml?c=71064&p=irol-govconducthttp://investor.itw.com/phoenix.zhtml?c=71064&p=irol-govconduct


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2012 fincom session 1

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